What Facebook Must Do to Justify Its High Price

2/4/2014 10:59AM

Facebook will eventually fall victim to its own success. That’s because investors are extrapolating the company’s unexpectedly strong revenue growth into the indefinite future. As a result, its success has created higher hurdles over which it must now jump. Mark Hulbert joins MoneyBeat. Photo: Facebook.

This transcript has been automatically generated and may not be 100% accurate.

... and by topping height that a change in its most recent quarter Facebook is setting itself up for even higher expectations down the road what will it had to do to meet those expectations ... and can't do those things MarketWatch's Mark Albers ... a dozen banks sell an e joins us to talk about Mark hell are you ... I aam fried contained a ton of things but Downer ... stocks to end well Companies the expectations but why do you think that can last ... the the ay ... ay ay ay ay ay ay ... this and I did this on Facebook for some time of course ... I didn't their proximity to start August and and so they can be excused for say mission any attention to me whatsoever but ... I do think that to Facebook being expectations test rated the stock higher hurdle over which it must job in ... one way of looking at it is ... to focus on the price to sales ratio the company when it came to market ... at a price sales ratio below twenty five which is used in the year ... it's the for example is in the low single digits ... so to work out five years ... the list price sales ratio will be and what we are a talk about that McCollam is a little but the average Internet companies ... price to sales ratio is five years after its IPO ... that averages spot ... so it can be Facebook is able to hold out that the edges meet with the average ... of past Internet IPO's ... its sales with up ... to quintuple ... over the five-year period as its prices inflation will contract by eighty percent ... in ... the Assembly just eighteen ... and I think if investors do the math the realize that ... even when it's doing well ... the firm has a face that revenues are growing ... at a faster pace than many expected ... is going to grow even faster pace in the project ... that in five years' time it's not going to be able to work for us fall into that one of things you hit on is the projection for sales in the first five years ... of public Apollo been traded companies ... and when to pull the chart Opel pull it up again ... on the face looks like they're tired of the in line with other companies ... that's not really a good thing though is it ... I the question we should stick to the IPO between ... the ninety nine five and two thousandseven ... and that the average revenue growth rate over the first five years the alliance ... will even in the face is almost exactly the line of its first two years as a publicly traded company which owns the other way but the ... stock couldn't ... get it simply matches ... the growth rate ... that said the revenue growth rate of those I get the tree nineteen ninety five and two thousandseven ... they say is facing a much lower price ... on its fifth anniversary as a publicly traded company the only way to avoid that ... its revenue growth that average faces for it to be trading at a much ... higher price to sales ratio one thing to remember is it's the it's another girl which of course is the analogy ever withdrawals ... while ... its fifth birthday as a publicly traded company ... price to sales ratio of eight was ... six point four while ... still higher than the market even if ... Facebook is able to match that which is a civic wanted a ... generous assumption ... nonetheless it's bad news and to grow at a faster pace ... in order for it to justify its current price ... it marked its stockpile catered out act and think you're right about this one ... thank you very much ... you're most welcome ...